Thursday, 30 July 2009

The Law Commssion get it wrong (updated x3)

As Eric Crampton points out over at Offsetting Behaviour the Wellington Wowsers Law Commission have released their report on the review of alcohol taxation and regulation and make much of the BERL report. As Eric also notes they get "independent" analysis on the report from Brian Easton. A bit like getting "independent" analysis of abortion from the Pope.

The Law Commission say this about the Burgess and Crampton reply to BERL:

The BERL report has been strongly criticised by two economists (Eric Crampton and Matt Burgess) on the grounds that BERL failed to include any of the economic benefits associated with alcohol consumption and also inflated the costs in a number of ways, including counting as a cost the money spent on alcohol that is consumed in such a way that it leads to alcohol-related harm.25 They concluded that the external costs of alcohol roughly match the amount currently collected by the alcohol excises. (Emphasis added.)

The bit in bold is just plain wrong since BERL did incorporate benefits and the way they did it is important for their result. Matt and Eric criticised BERL not for leaving out the benefits, but for including them wrongly! As Eric has written:

They say that we misinterpret their brief and consequently fault them for things that were never within their remit: specifically, that they do not include the benefits of alcohol.

It is certainly true that benefits were not within the RFP. We noted as much throughout our report, and in our executive summary. However, counting benefits as being precisely equal to zero is what allows BERL to count private costs as social costs. As BERL correctly notes at page 173 of their report: (Emphasis added.)

When measuring the social cost of harmful AOD use, known private costs should generally be excluded…because private costs are offset by private benefits, so there is no net social cost

They there cite Collins and Lapsley, their primary source, as warning against the counting of private costs. They then go on:

In the case of harmful drug use, however, individual decisions are not necessarily made on a rational basis, that is, a decision where the consumer equates their costs and benefits. We argue that the consequences of irrational consumption decisions lead to private costs that are borne by the rest of society, and hence should be included as social costs… We assume that it is irrational to drink alcohol to a harmful level and that harmful alcohol use has zero private benefit.

Without that assumption, BERL could not count private costs as socially relevant. Their entire method hinges critically on that they have decided to assume zero gross benefits to drinkers of their drinking. So while benefits were outside of the RFP, they have taken a very strong position on the absence of benefits: a position without support in the economic literature. It consequently is fair game to critique BERL for counting the benefits as being equal to zero. And we do not understand how BERL can say with a straight face "we cannot accept criticism for not covering issues that were outside the project's brief" when their entire method is built on their having brought it into the project's brief.

If benefits are outside the remit, the proper approach is to consider only external costs. At minimum, BERL should have apportioned its cost tally between private and external costs. Instead, they termed all costs as social costs.